Forecasting vs. Scenario Planning
Few will win the future in an increasingly competitive, complex, and interdependent world. Leaders need to think harder, plan better and run faster. We have to guess more about the future and be right more often.
Most of the tangible information that we have about the future comes through forecasting trends & variables that anticipate input prices, rates, operating costs and volume within a range of sensitivity. These extrapolations are essential to short-term planning efforts. However, scenario planning typically takes a long-term horizon, adding an imaginative dimension to planning activities, based on systematically flexing the hypothetical.
The strategic scenario planning process supports decision makers and their teams in mapping strategic action and defining success in a range of possible and plausible futures. Scenario planning differs from forecasting in that it does not extrapolate variables, but is built into uncertainty logics, and shaped by the megatrends that are critical to the organization or business unit. Scenario development, planning and deployment are process tools used by top leaders to improve strategic conversations, real option generation and decision quality.
If we do not imagine or consider the hypothetical via scenario planning, we run the risk of being blindsided by surprises unseen while forecasting
Forecasting and scenario planning should not be thought of as juxtaposed forces, but rather complementary tools for better strategy development and higher-quality decisions amid the complexity of the future. They both provide input into planning and capital allocation: from investments in assets to operational activities to setting prices and executing experiments.
There is an intricate relationship between quality strategic thinking and organizational survival. Firms that rely solely on forecasting may fall into the trap of thinking that the future will be extrapolated from the past. Firms that rely solely on scenario planning may ignore history and overestimate change in the short-run. Firms taking an overly sideways-looking approach to strategy development by constantly benchmarking against the competition may forget to innovate.
What is the proper mix of strategic planning processes in the firms? That should be developed by the leaders. Trends & Scenario Group has developed a strategy development process that integrates forecasting and scenario planning with other well known tools such as SWOT, Porter’s 5 Forces, Blue Ocean Strategy and more so that each tool gets deployed at the proper time in the process so as to maximize effectiveness. An outline of Trends & Scenario Group’s strategy process can be found here.